If All Countries Produce the Same Good (Or the Same

question 35

Multiple Choice

If all countries produce the same good (or the same set of goods) and goods are freely traded among countries,so that the real exchange rate equals one,then the relationship between domestic and foreign prices and the nominal exchange rate is

• A)P = P_For / e_nom.
• B)P = e_nom / P_For.
• C)e_nom = P × P_For.
• D)P = P_For.

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Definitions:

Risk-Free Rate

The return on investment with no risk of financial loss.

Market Risk Premium

The excess return that investors require for choosing to purchase stocks over risk-free securities.

SML Slope

The slope of the Security Market Line, which represents the risk-return trade-off at any given time, illustrating the expected return of a security per unit of risk.

Capital Asset Pricing Model

A model used to determine the theoretical expected return on an investment, considering risk-free return, the investment's volatility, and the expected return of the market.